Retail property market showing muscle in region

CBRE commentary: Investors like stability as office space languishes

Published 8:58 pm, Wednesday, December 18, 2013

The commercial real estate market appears to finally be on the rebound, and a national brokerage firm with a regional office in Stamford, says the retail sector is leading the way.

Retail properties showed the strongest growth in capital values and rents of all property types globally in the third quarter, according to Raymond Torto, Ph.D., chairman of CBRE Research, a unit of CBRE Group.

"Commercial real estate fundamentals are expected to improve and catch up with capital markets demand as regional economies continue to recover," Torto said.

On the regional level, the retail property market is seeing a rebirth, according to Gene Pride, senior vice president, capital markets, at CBRE's Stamford office.

"Retail in lower Fairfield County is in high demand from both investors and tenants alike due to the affluent local residents with disposable income and significant barriers to new construction that will limit competition," he said. "Both see our location as having long-term appeal with exceptional stability and growth potential."

Westport, Darien, Greenwich, Norwalk and Stamford have experienced more transactions due to the appeal of these communities as strong retail markets and a relatively larger inventory of available assets that have come to the market, according to Pride.

"Investors are actively searching for high-quality retail investments that are fully leased to strong tenants on longer-term leases," he said, adding that those shopping centers are selling for prices similar to the 2007 peak mainly due to the limited number of available offerings. "Weaker centers with some vacancy or limited tenant credit see less demand."

$34 million Bethel sale

Exemplifying the attractiveness of strong properties, Pride noted the sale last month of the Big Y Shopping Center in Bethel to Cedar Realty Trust for $34.5 million. The 101,123-square-foot center on Route 6 is fully leased with 12 tenants. CBRE represented both the seller, CE Bethel, and Cedar Realty.

"We also noted that retail is one of the most attractive investments in real estate," he said. "It's rebounded quite well from the recession in the U.S., and you have growth opportunities abroad. Well-performing retail assets have been pretty stable."

Tenant mix

The tenant mix at shopping centers is crucial in establishing the value of a property, according to Tron, and vacancy levels are declining as the economy improves.

Complexes with large chains as tenants were not as severely impacted by the recession, he said, but shopping centers that depended on independent stores struggled.

"The hardest hit were small community strip centers with mom-and-pop tenants who weren't able to weather the storm," Tron said.

But as the economy improves, independent stores are replacing the ones that departed, increasing the value of the retail centers, he said.

"Credit has thawed a lot," Tron said. "There will be landlords willing to take risks on mom-and-pop stores."

`Good demographics'

Greater Danbury is one of those places where there has been a resurgence in the retail property market.

"Retail is doing wonderfully in Danbury," said Jeff Ryer, president and CEO of Ryer Associates, a Danbury commercial real estate brokerage firm.

"Planet Fitness is coming to Danbury at 110 Federal Road," he said, in space formerly occupied by Borders Books & Music. "We have developments going up in New Milford. We have good demographics."

When finished, Litchfield Crossing in New Milford will cover nearly 300,000 square feet. About 130,000 square feet has been completed, and major tenants already in place include Home Goods and Kohl's, according to Ryer, who said a Savings Bank of Danbury branch is being built in New Milford and a new Webster Bank branch is under way at the Litchfield Crossing.

The Shops at Marcus Dairy in Danbury would have been filled more quickly had not the recession occurred, according to Ryer, noting the complex this year welcomed a Whole Foods store.

Winning streak

Last quarter marked the sixth consecutive quarterly gain in operating income for the retail real estate industry, the longest stretch since 2006, according to the national commercial real estate brokerage firm Cushman & Wakefield. Operating income from stores in the National Council of Real Estate Investment Fiduciaries rose by 6.3 percent on an annually adjusted basis.

Retail total returns outpaced all other sectors, including office, multi-family, hotel and industrial over the last year. Retail showed a 13.2 percent total return, more than 2 percent better than the average across all property types.

Location, as well as tenant mix and tenants' revenue at a center are key ingredients in whether or not an investor buys a shopping complex, said Jim Fagan, senior managing director at Cushman & Wakefield's Stamford office. A solid property can command better loan terms.

Vacancies drop in Darien, Stamford

There has been an uptick in demand for space at shopping centers owned by Urstadt Biddle Properties, a Greenwich-based, real estate investment trust that owns or has equity interests in 66 properties containing about 5.1 million square feet of space.

"Our vacancy levels are dropping. There's more demand for retail space. Some retailers are becoming more confident in the economy," said Willing Biddle, CEO of Urstadt Biddle, which this month reported fourth quarter net income more than doubled to $3.99 million, or 12 cents per share, compared with $1.58 million, or 5 cents a share, for the same period last year. "Retailers who have figured out how to integrate the Internet into their businesses are looking to expand."

The vacancy levels of many of the Urstadt Biddle portfolios are in the single-digit range, including Goodwives Plaza in Darien and Ridgeway Plaza in Stamford, where each has a vacancy level of about 2 percent, he said.

Finding good properties

"We see communities with wealthier, denser markets are doing better because there's a movement to places like Stamford and White Plains, N.Y. Our problem is finding good properties to buy," Biddle said, adding that his company this month sold two industrial properties in Dallas and St. Louis to focus more on retail properties in the region.

In 2013, Urstadt Biddle used some of $173 million in equity capital to purchase nine retail properties and two office buildings at a cost of $67.1 million and to purchase a 50 percent undivided interest in two additional retail properties at a cost of $18 million. The company also reported that it is in negotiations to buy five retail properties.

"We're a publicly traded fund. We have a pretty strong investor base," Biddle said, commenting that he is seeing more competition for properties. "There are more people looking to buy retail assets. It's due to new buyers in our market who feel compelled to buy. Some may be overly optimistic about retail."

`Under-demolished'

Norman Lotstein, a retail specialist at Pyramid Realty, a commercial brokerage firm in Stamford, is experiencing much the same climate.

"There's a very strong market for retail properties (in the region). That's an expression of confidence," said Lotstein, whose family owns High Ridge Center, a shopping center in Stamford which recently welcomed a Trader Joe's grocery store.

There is aggressive competition for the purchase of retail properties in the region, according to Lotstein, who said retail properties fared much better in the recent recession, compared with office properties.

But the demand is greater for high-end, busy shopping centers that command higher prices than for centers with lower-end stores and less traffic, said Steve Blank, senior fellow at the Urban Land Institute with a focus on real estate capital markets.

"Everybody must be in the `A' properties because that's where shoppers are," he said, adding that in some communities there are too many shopping centers. "We're not over-retailed. We're under-demolished."

Uneven rebound

Some retail properties that are under-utilized perhaps could be put to better use, Blank said.

In the southeastern part of Fairfield County, particularly along Route 1, there has been a renewed interest in retail sites, said Steven Spector, president of Interstate Realty Advisors in Milford, noting the arrival of a Crunch Fitness in Orange and Stratford and a Big Lots in Milford.

But depending on location, some owners of retail space are struggling to retain and attract merchants, he said.

"There are still areas where landlords are working with tenants so they will stay," Spector said. "We're still not seeing the price per square foot that we once saw."

But in some pricier areas of Fairfield County he has seen "staggering prices" for retail properties.

"There are buyers for retail. In the last few years, there hasn't been a lot of new retail construction," Spector said. "Fairfield County is still considered a prime, attractive place to own property."